2011 Becker CPA AUD Class Questions

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CLASS QUESTION EXPLANATIONS1. Auditing 1 class question explanations 3

2. Auditing 2 class question explanations 9





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Becker Professional Education I CPA EXJm Review Class Question Explanations

AUDITING 1

1. CPA-02304Choice "c" is correct. The objective of the fourth reporting standard is to prevent any misinterpretation ofthe degree of responsibility the auditor assumes when his or her name is associated with financialstatements.Choice "a" is incorrect. The auditor may express different opinions on each of the basic financialstatements.Choice "b" is incorrect. While the fourth reporting standard may deter deliberate limitation of scope by theclient, this is not its objective.Choice "d" is incorrect. An auditor may express an opinion on one financial statement, such as a balancesheet, and not on other related financial statements, as long as the auditor's procedures have not beenrestricted.

2. CPA-02302Choice "c" is correct. An auditor may express an opinion on one financial statement, such as a balancesheet, and not on other related financial statements, provided that the auditor's procedures and access toall information underlying the basic financial statements have not been restricted. This is simply anengagement with limited reporting objectives.Choice "a" is incorrect. Compliance with this request would not violate any ethical standards of theprofession.Choice "b" is incorrect. A "piecemeal" opinion, which is prohibited, is one in which different opinions areissued on enough different elements in the same financial statement as to constitute a "major portion" ofthe financial statements.Choice "d" is incorrect. As iong as the auditor's scope has not been limited, the auditor may report ononly one financial statement.

3. CPA-02787Choice "d" is correct. If a contingent liability is probable, but not estimable, and it is disclosed in thefootnotes, the auditor issues an unqualified audit report without an explanatory paragraph.Choice "a" is incorrect. When a contingent liability is probable, but not estimable, it should be disclosed inthe footnotes. A qualified opinion due to a scope limitation would result if sufficient audit evidence exists,but is not available to the auditor (possibly due to client imposed restrictions).Choice "b" is incorrect. A qualified opinion due to a departure from GMP would be issued if the client didnot disclose the contingent liability in the footnotes to the financial statements.Choice "c" is incorrect. If a contingent liability is probable, but not estimable, and it is disclosed in thefootnotes, the auditor issues an unqualified audit report without an explanatory paragraph.

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Class Question Explanations Becker Professional Education I CPA barn Review

4. CPA-02544Choice "d" is correct. When the principal auditor decides not to make reference to the audit of the otherauditor. in addition to satisfying himself or herself as to the other auditor's professional reputation andindependence, he or she should visit the other auditor, discuss the audit procedures, and/or review theaudit programs and audit documentation of the other auditor.Choice "a" is incorrect. The principal auditor may decide not to make reference to the other auditor evenwhen the portion of the financial statements audited by the other auditor is material. When the auditortakes this position, he or she should not state in his report that part of the audit was made by anotherauditor.Choice "b" is incorrect. The principal auditor's decision not to assume responsibility for the other auditor'swork need not be included in the engagement letter.Choice "c" is incorrect. The principal auditor does not need permission from the other auditor to assumeresponsibility. Permission is needed only if the principal auditor decides to divide responsibility and wouldlike to refer to the other auditor by name.

5. CPA-02764Choice "a" is correct. When circumstances indicate that financial presentation in accordance with GAAPwould be misleading, a departure from GAAP is permissible. In such cases, the auditor should disclosethe departure in an explanatory paragraph, but may issue an unqualified opinion on the financialstatements.Choices "b", "c", and "d" are incorrect. The auditor's opinion need not be qualified or adverse since thefinancial statements are presented fairly.

6. CPA-02389Choice "c" is correct. The auditor has a responsibility to evaluate whether there is substantial doubt aboutthe entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year.If the auditor concludes that there is substantial doubt, the auditor should include an explanatoryparagraph following the opinion paragraph and should include the terms, "substantial doubt" and "goingconcern." The time period is not mentioned in the audit report.Choices "a", "b", and "d" are incorrect, as explained above.

7. CPA-02417Choice "c" is correct. A change in accounting estimate (such as a change in the useful life of adepreciable asset) is accounted for prospectively and does not affect the comparability of financialstatements between periods. Since the auditor's standard report implies that consistency exists, nomodification to the report is necessary.Choices "a", "b", and "d" are incorrect. Assuming their effects are material, changes in accountingprinciple result in the addition of an explanatory paragraph (following the opinion paragraph) in theauditor's report. Such a consistency modification is required even if the previous accounting principle wasnot GAAP and even if management lacks reasonable justification for the change. (Note: A lack ofreasonable justification for the change may also give rise to a report modification based on a departurefrom GAAP.)

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Becker Professional Education I CPA Exam Review

8. CPA-02469

Class Question Explanations

Choice "c" is correct. The only phrase acceptable in a qualified opinion is "except for." In the presence ofinadequate disclosure, the auditor's opinion would state "In our opinion, except for the omission of theinformation discussed in the preceding paragraph,..."Choice "a" is incorrect. "Subject to" opinions are not used.Choice "b" is incorrect. In the presence of inadequate disclosure, the auditor's opinion would state"except for. .." The phrase "with the foregoing explanation" is expressly prohibited.Choice "d" is incorrect. The statement, "does not present fairly," would be used for an adverse opinion,not for a qualified opinion.

9. CPA-02539Choice "b" is correct. If the financial statements, including accompanying notes, fail to discloseinformation that is required by generaliy accepted accounting principles, the auditor should express aqualified or adverse opinion.Choice "a" is incorrect. A disclaimer of opinion is not an appropriate report for inadequate disclosure or aGAAP departure.Choice "c" is incorrect. A disclaimer of opinion or an unqualified opinion with an explanatory paragraphare not appropriate for a client with a material undisclosed item or GAAP departure.Choice "d" is incorrect. An unqualif ied opinion with an explanatory paragraph is not appropriate for aclient with a material undisclosed item or GAAP departure.

10. CPA-02376Choice "d" is correct. The introductory paragraph of the standard unqualified report includes a statementthat the financial statements are the responsibility of the company's management. Management's refusalto accept responsibility for the fair presentation of the financial statements therefore precludes issuanceof this standard report.Choices "a", "b", and "c" are incorrect, as there are generally alternative procedures the auditor canperform to accomplish his or her goals.

11. CPA-02834Choice "d" is correct. When a qualified opinion results from a lack of audit evidence, the situation shouldbe described in an explanatory paragraph preceding the opinion paragraph, and referred to in both thescope and opinion paragraphs.Choices "a", "b", and "c" are incorrect, per the above explanation.

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12. CPA-02452


Choice "b" is correct. A disclaimer of opinion means that the auditor was unable to obtain sufficientappropriate audit evidence to provide a reasonable basis for an opinion, thus, NO opinion is expressed.An unjustified accounting change is a GAAP departure that may result in a qualified or adverse opinion,not a disclaimer.Choice "a" is incorrect. Inability to determine amounts associated with an employee fraud scheme is ascope limitation that may result in a disclaimer of opinion.Choice "c" is incorrect. Refusal by the client to permit the auditor to confirm accounts receivable is ascope limitation and may result in a disclaimer of opinion.Choice "d" is incorrect. Refusal of management to sign a management representation letter casts doubton the audit evidence gathered and automatically constitutes a limit on scope that would likely result in adisclaimer of opinion.

13. CPA-03040Choice "a" is correct. If, during the current audit, auditors become aware of circumstances or events thataffect the financial statements of a prior period, they should consider such matters when updating thereport on the financial statements of the prior period. For example, if auditors have previously qualifiedtheir opinion or expressed an adverse opinion on financial statements of a prior period because of adeparture from generally accepted accounting principles, and the prior period financial statements arerestated in the current period to conform with generally accepted accounting principles, the auditor'supdated report on the financial statements of the prior period should indicate that the statements havebeen restated and should express an unqualified opinion with respect to the restated financial statements.Choice "b" is incorrect. The predecessor auditor generally would not change a previously issued opinionwhen reissuing the audit report.Choice "c" is incorrect. A difference of opinions between periods would not result in the auditor changingthe opinion on a previously issued audit report.Choice "d" is incorrect. Restatement of financial statements following a pooling of interests affectscomparability of the financial statements, but would not result in a change in opinion from the audit reportpreviously issued.

14. CPA-04614Choice "c" is correct. When a successor auditor does not present the predecessor auditor's report, thesuccessor should indicate in the introductory paragraph that the predecessor auditor expressed anunqualified opinion on the prior year's financiai statements.Choice "a" is incorrect. No assurance is provided regarding the fair presentation of the prior year'sfinancial statements.Choice "b" is incorrect. The auditor does make reference to the prior year's financial statements,indicating in the introductory paragraph that the predecessor auditor expressed an unqualified opinion onthe prior year's financial statements.Choice "d" is incorrect. There is no requirement that the successor obtain a letter of representation fromthe predecessor auditor, although the reverse may be true (the predecessor should obtain a letter ofrepresentation from the successor if the previous report is to be reissued).

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Becker Professional Education I CPA Lx


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Class Question Explanations Becker Professional Education I CPA Exam Review

18. CPA01499Choice "c" is correct. Independence of a member is impaired if the CPA's spouse is employed by theclient in a position which is audit-sensitive. Examples of positions that are audit-sensitive include cashier,internal auditor, accounting supervisor, purchasing agent, or inventory warehouse supervisor.Choice "a" is incorrect. The following types of loans do not impair independence:1) Automobile loans,2) Loans of the surrender value under terms of an insurance policy,3) Borrowings fully collateralized by cash deposits at the same financial institution, and4) Credit cards and cash advances on checking accounts with an aggregate balance not paid currentlyof $5,000 or less.Choice "b" is incorrect. Litigation not related to the engagement for an immaterial amount does not impairindependence.Choice "d" is incorrect. Acting as an honorary trustee for a not-for-profit company does not impairindependence.19. CPA-01486Choice "c" is correct. A CPA may not accept a commission for recommending a product to a client if theCPA audits or reviews that client's financial statements.Choice "a" is incorrect. A CPA may resell a product to a client.Choice "b" is incorrect. This is not considered incompatible with a CPA's practice.Choice "d" is incorrect. A CPAmay accept engagements obtained through the efforts of third parties.20. CPA-05805Choice "b" is correct. Failure to return records to a client after the client makes a demand is consideredto be an act discreditable to the profession, and as such violates the profession's ethical standards.Choice "a" is incorrect. There is no prohibition against using a records-retention agency to storeconfidential client records.Choice "c" is incorrect. Arranging with a financial institution to collect notes issued by a client in paymentof fees due does not violate the profession's ethical standards.Choice "d" is incorrect. A compilation of financial statements does not require the auditor to beindependent (although the lack of independence should be disclosed).21. CPA-06110Choice "c" is correct. The ethical standards that apply to the audits of issuers (SOx/PCAOB/SEC) requirethat the lead partner rotate off the audit engagement after 5 years. The AICPA Code of ProfessionalConduct, which is followed when auditing nonissuers, does not require audit partner rotation.Choice "a" is incorrect. All U.S. ethical standards prohibit the performance of financial informationsystems design and implementation services for audit clients.Choice "b" is incorrect. Loans to or from clients, other than loans from financial institutions under normallending policies, are prohibited for audits of issuers and nonissuers under all ethical standards.Choice "d" is incorrect. Any direct financial interest in a client impairs independence, whether the client isan issuer or a nonissuer.

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Becker Professional Education I CPA EXJIl1 Review Class Question Explanations

AUDITING 2

1. CPA-02432Choice "c" is correct. The AICPA's Statements on Quality Control Standards assert that a system ofquality control for a firm encompasses the firm's organizational structure and the policies and proceduresestablished by the firm in order to provide reasonable assurance of conforming to professional standards.Toward that end, policies and procedures for human resources, including assigning personnel toengagements, should be established to provide reasonable assurance that the persons assigned willhave the technical training and proficiency required to perform their work and progress within the firm.Choice "a" is incorrect. Compliance with laws and regulations falls under the Code of ProfessionalConduct.Choice "b" is incorrect. The use of statistical sampling techniques involves auditing standards, notstandards of quality control.Choice "d" is incorrect. The consideration of audit risk and materiality involves auditing standards, notstandards of quality control.

2. CPA-02418Choice "c" is correct. A firm's failure to establish or comply with an appropriate system of quality controldoes not necessarily imply that the firm has failed to follow professional standards on individualengagements.Choice "a" is incorrect. Quality control standards relate to the conduct of a firm's entire practice whereasprofessional standards such as GAAS relate to the conduct of an individual engagement.Choice "b" is incorrect. The adoption of an effective system of quality control standards is conducive tocomplying with professional standards on individual engagements.Choice "d" is incorrect. Deficiencies in or noncompliance with a firm's quality control standards do notnecessarily indicate a lack of compliance with professional standards for anyone specific engagement.

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3. TBS-00001

Becker Professional Education I CP/\ Lxilrn Review

Answer

1. We have audited the accompanying statements of assets and liabilities arising from cashtransactions of XYZ Company as of December 31, Year 2 and Year 1, and the related statements Incorrectof income and retained earnings for the years then ended.

2. We conducted our audits in accordance with auditing standards generally accepted in the Appropriate and completeUnited States of America.

3. As described in Note X, these financial statements were prepared using a comprehensive Incompletebasis of accounting other than generally accepted accounting principles.

Explanation:1. Incorrect. Statements of income and retained earnings are accrual basis financial statements. The

report should more properly refer to "...the related statements of revenue collected and expensespaid for the years then ended."

2. Appropriate and complete. AUditing standards still apply when auditing OCBOA financialstatements.

3. Incomplete. The basis of accounting shouid be explicitly identified:"As described in Note X, these financial statements were prepared on the basis of cashreceipts and disbursements, which is a comprehensive basis of accounting other thangenerally accepted accounting principles. "

4. CPA-03044Choice "a" is correct. In a compilation engagement, the accountant should read the financial statementsfor obvious material misstatements.Choice "b" is incorrect. Compiled financial statements may be used to obtain credit. (The prohibition onusing compiled financial statements to obtain credit relates to personal financial statements when theaccountant would like to be exempted from the requirements of SSARS.)Choice "c" is incorrect. As part of a review engagement, an accountant would ask about actions taken atboard of directors' meetings that affect the financiai statements. Inquiry is not part of a compilationengagement.Choice "d" is incorrect. Analytical procedures are part of a review engagement, but not necessary for acompilation engagement.

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Becker Professional Education I CPA Exam Review Class Question Explanations

5. CPA-03011Choice "c" is correct. Financial statements compiled by an accountant that are expected to be used by athird party should be accompanied by a report stating that the financial statements have not been auditedor reviewed.Choice "a" is incorrect. There is no discussion of the scope of the accountant's procedures in acompilation report. The appropriate reference to the representation of management is that a compilationis "limited to presenting in the form of financial statements information that is the representation ofmanagement."Choice "b" is incorrect. This statement is part of the standard audit report, not the accountant'scompilation report.Choice "d" is incorrect. it is a review report, not a compilation report, that states that a review consistsprincipally of inquiries of company personnel and analytical procedures applied to financial data.

6. CPA-03142Choice "a" is correct. Observing safeguards over access to and use of assets and records is part of thestudy and evaluation of the client's internal control; such an evaluation is not conducted in a review.Choice "b" is incorrect. As part of a review engagement, the accountant performs analytical proceduresto identify relationships and items that appear to be unusual. Analytical procedures consist ofcomparisons of the financial statements with statements for a comparable prior period, comparisons ofthe financial statements with anticipated results (budgets and forecasts), and a study of the relationshipsof the elements of the financial statements that would be expected to conform to a predictable pattern.Choice "c" is incorrect. As part of a review engagement, the accountant inquires of management aboutactions taken at the board of directors' meetings.Choice "d" is incorrect. As part of a review engagement, the accountant performs analytical proceduresto identify relationships and items that appear to be unusual. Analytical procedures consist ofcomparisons of the financial statements with statements for a comparable prior period, comparisons ofthe financial statements with anticipated results (budgets and forecasts), and a study of the relationshipsof the elements of the financial statements that would be expected to conform to a predictable pattern.

7. CPA-04629Choice "d" is correct. The accountant is required to obtain a representation letter from management.When the client does not provide such a letter, the review is incomplete and the accountant may not issuethe review report.Choice "a" is incorrect. Lack of a reasonable justification for a change in accounting principle is adeparture from GAAP, generally resulting in a modified report. It would not require the accountant towithdraw from the engagement.Choice "b" is incorrect. The income tax basis is an "other comprehensive basis of accounting" (OCBOA).11 is acceptable for an auditor to review OCBOA financial statements and there would be no need towithdraw.Choice "c" is incorrect. A review engagement may involve reporting on only one financiai statement aslong as the scope of the engagement is not limited. There would be no need to withdraw in thiscircumstance.

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8. CPA-02976


Choice "c" is correct. Financial statements reviewed by an accountant should be accompanied by areport stating that a review is substantially less in scope than an audit.Choice "a" is incorrect. While a review does provide only limited (negative) assurance, this statement isnot explicitly stated in the accountant's review report.Choice "b" is incorrect. Examination of client information is part of an audit engagement, not a reviewengagement.Choice "d" is incorrect. While this statement is true, it is not explicitly stated in the accountant's reviewreport.

9. CPA-02970Choice "d" is correct. Failure to properly capitalize leases that the accountant considers material to thefinancial statements is a departure from GAAP. If management will not capitalize the leases, theaccountant should modify the standard review report or withdraw from the engagement. If modification tothe report is sufficient to disclose the departure from GAAP, then the accountant may modify the reviewreport.Choice "a" is incorrect. An opinion is not issued with a review report. Instead, the report may be modifiedto disclose the departure from GAAP.Choice "b" is incorrect. The accountant may still provide limited assurance with respect to the entity'sfinancial statements in the review report, as long as the departures from GAAP are disclosed. The thirdparagraph of the review report would read, "Based on my review, with the exception of the matterdescribed in the following paragraph, I am not aware of any material modifications ..."Choice "c" is incorrect. There is no need for the auditor to restrict the use of the financial statements.

10. CPA-03381Choice "c" is correct. If the review report on the current period includes a separate paragraph describingthe responsibility assumed for the prior period's financial statements, the additional paragraph shouldexplicitly state that no audit procedures were performed subsequent to the previous period's audit.Choice "a" is incorrect. The review report can be considered a general use report; no restriction on use isnecessary.Choice "b" is incorrect. The previous year's audit report may still be relied upon.Choice "d" is incorrect. No mention of the reasons for the change in engagement service is necessary.

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Becker Professional Education J CPA Exam Review Class Question Explanations

11. TBS-00002J.n9.!dlry A1. Of the client's management. R2. Of the client's attorney. P3. Regarding compliance with GAAP. R

Analytical review A4. Comparison of interim financial information with information from previous periods. R5. Comparison of disaggregated revenue data for the current period with that of prior periods. R6. Comparison of interim financial information with similar information from other companies in the prestaurant equipment industry.

Reporting A7. Add a paragraph to the review report to discuss scope limitations encountered during the review. N8. Add a paragraph to the review report to disclose a lack of consistency. P9. Add a paragraph to the review report to emphasize a going concern matter that is already disclosed in the pfinancial statements.

The accountant is required to make inquiry of company management.The accountant may inquire of the company's attorney, but is not required to do so.The accountant is required to make inquiry regarding compliance with GAAP.

Explanation:l.!:!ill!kY1. R2. P3. RAnalytical review4. R The accountant should compare the interim financial information with information from previousperiods (e.g., the immediately preceding quarter, the comparable quarter from the precedingyear, etc.).5. R The accountant should compare disaggregated revenue data for the current interim period withthat of comparable previous periods.6. P The accountant is not required to compare the interim financial information with similarinformation from other companies within the industry, but is not precluded from doing so.Reporting7. N Note that in situations in which the accountant is unable to perform necessary procedures, noreview report should be issued.8. P The auditor may choose to emphasize this matter in a separate explanatory paragraph, but is notrequired to do so.9. P The auditor may choose to emphasize this matter in a separate explanatory paragraph, but is notreqUired to do so.

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12. CPA-03419


Choice "d" is correct. Since the CPA has not audited the interim financial statements of this publicly-heldentity. the CPA (Green) should request that the first quarter interim financial statements be marked asunaudited.Choices "a", "b" and "c" are incorrect. As long as the CPA has completed the review, his or her namemay be included in the annual report.

13. CPA-03424Choice "b" is correct. Comments concerning the unaudited interim financial information provide negativeassurance as to whether any material modifications should be made to the unaudited interim financialinformation in order for it to be in conformity with GAAP.Choice "a" is incorrect. Comfort letters are not required by the Securities Act of 1933, and copies are notfiled with the SEC.Choice "c" is incorrect. Comfort letters are addressed to the underwriter and are not included in theregistration statement accompanying the prospectus.Choice "d" is incorrect. The comfort letter does not update the opinion on previous financial statements.Often, underwriters will request that the accountants repeat in the comfort letter their report on the auditedfinancial statements. Because of the special significance of the auditor's report, the auditors should notrepeat their report.

14. CPA-02445Choice "b" is correct. A CPA is required to comply with the provisions of Statements on Standards forAttestation Engagements (SSAE) when engaged to review management's discussion and analysis(MD&A) prepared pursuant to rules and regulations adopted by the SEC.Choice "a" is incorrect. Attestation standards were created to provide assurance on representations otherthan historical financial statements and in forms other than the positive opinion. Unless the financialstatements in question are something other than historical financial statements (which is not indicated inthe question), it is likely that other standards (SAS, SSARS) would be more appropriate for thisengagement.Choice "c" is incorrect. An attest engagement is one in which a CPA is engaged to issue an examination,a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subjectmatter, that is the responsibility of another party. Providing the client with a financial statement formatdoes not fall under this description.Choice "d" is incorrect. Statements on Standards for Attestation Engagements (SSAE) do not apply toaudits of financial statements. (The CPA would, however, be required to comply with GAAS -- specificallythe general standards and the standards of fieldwork -- when engaged to audit financial statementsprepared for use in another country.)

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15. CPA02450Choice "b" is correct. A report on agreed-upon procedures should include a list of the proceduresperformed (or reference thereto) and the related findings.Choice "a" is incorrect. An agreed-upon procedures engagement to evaluate compliance with contractualrequirements does not address the fair presentation of financial statements.Choice "c" is incorrect. A report on agreed-upon procedures should be in the form of procedures andfindings. An opinion is not provided.Choice "d" is incorrect. A report on agreed-upon procedures would indicate that the sufficiency of theprocedures is solely the responsibility of the specified parties, who in this case would be the group ofroyalty recipients (not Mill).

16. CPA02514Choice "c" is correct. Financial projections are hypothetical, "what if' prospective financial statements.Because the user may need to ask the responsible party questions about the underlying assumptions,financial projections are "restricted use" reports, whose use is restricted to the responsible party andthose third parties with whom the responsible party is negotiating directly.Choices "a", "b" and "d" are incorrect. Only financial forecasts (based on expected conditions) areappropriate for general use.

17. CPA02436Choice "b" is correct. When a CPA examines projected financial statements, the standard report shouldinclude a statement that the examination "... included such procedures as we considered necessary toevaluate both the assumptions used by management and the preparation and presentation of theprojection."Choice "a" is incorrect. The accountant's report on the examination of projected financial statementswould not explain the principal differences between historical and projected financiai statements.Choice "c" is incorrect. The accountant's report on the examination of projected financial statementswould not make any reference to the CPA's auditor's report on the historical financial statements.Choice "d" is incorrect. The accountant's report would not express an opinion on the client's ability tocontinue as a going concern.

18. CPA04618Choice "c" is correct. The accountant should evaluate the pro forma adjustments, but need notreevaluate the entity's internal control over financiai reporting.Choices "a", "b" and "d" are incorrect, based on the above explanation.

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1. CPA04620

Becker Professional Education I CPA txLlIn R0view

AUDITING 3

Choice "c" is correct. It is not appropriate for the successor auditor to request a review of thepredecessor auditor's engagement letter. This is a business matter between the client and thepredecessor auditor that has no impact on the successor's audit. Conversely, review of the predecessorauditor's working papers (aUdit documentation) is appropriate and customary to facilitate the successor'saudit.Choices "a", "b", and "d" are incorrect, based on the above explanation.2. CPA02673Choice "a" is correct. An understanding with the client should be established regarding management'sresponsibilities, which include identifying and ensuring that the entity complies with applicable laws andregulations. The understanding should be documented through a written communication, such as anengagement letter.Choice "b" is incorrect. Judgments about materiality are the auditor's responsibility and wouid not beincluded in an engagement letter.Choice "c" is incorrect. Management would not necessarily be responsible for illegal acts committed byemployees.Choice "d" is incorrect. The auditor is not responsible for searching for significant internal controldeficiencies.3. CPA02675Choice "c" is correct. Procedures that an auditor may consider in planning the audit include discussingthe type, scope, and timing of the audit with the client's management.Choice "a" is incorrect. Identifying specific internal control activities that are likely to prevent fraud is anaudit procedure, but not an initial planning activity.Choice "b" is incorrect. Evaluating the reasonableness of the client's accounting estimates is not aplanning activity. It is part of the evidence gathered later in the audit process.Choice "d" is incorrect. Inquiring of the client's attorney is not a planning activity. It is part of the evidencegathered later in the audit process.4. CPA03088Choice "d" is correct. In developing an overall audit strategy, an auditor should consider preliminaryevaluations of materiality, audit risk, and internal control.Choice "a" is incorrect. Evaluation of results from sampling applications would be performed duringfieldwork, after the planning process has been completed.Choice "b" is incorrect. Findings from interim audit testing would be considered during fieldwork, after theplanning process has been completed.Choice "c" is incorrect. Inquiry of a client's attorney and evaluation of the attorney's response isperformed during fieldwork, after the planning process has been completed.

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5. CPA-02761


Choice "b" is correct. Materiality levels include an overall level for each statement; however, because thestatements are Interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality forplanning purposes in terms of the smallest aggregate level of misstatements that could be consideredmaterial to anyone of the financial statements.Choice "a" is incorrect. The concept of materiality recognizes that some matters, either individually or inthe aggregate, are important for the fair presentation of financial statements in conformity with GAAP,while other matters are not important.Choice "c" is incorrect. Materiality judgments are made in light of the surrounding circumstances andnecessarily involve both quantitative and qualitative considerations.Choice "d" is incorrect. The auditor's consideration of materiality is influenced by his or her perception ofthe needs of a reasonable person relying on the financial statements.

6. CPA-02682Choice "d" is correct. The independent auditor is solely responsible for reporting on the financialstatements. Thus, while he or she may use the work of the entity's internal auditor (both work alreadyperformed and work performed as part of the audit), independent auditors may not share anyresponsibility involving judgments, including the assessment of inherent and control risk. This is truebecause the internal auditor, even if assessed to be both competent and objective, is not independent.Choices "a", "b", and "c" are incorrect, based on the above explanation.

7. CPA-02754Choice "c" is correct. Inherent risk and control risk differ from detection risk in that they existindependently of the audit of financial statements, whereas detection risk is related to the auditor'sprocedures and can be changed at the auditor's sole discretion.Choice "a" is incorrect. inherent risk and control risk exist independently of the audit and do not arisefrom misapplication of auditing procedures.Choice "b" is incorrect. Both the risk of material misstatement (including control risk and inherent risk)and detection risk may be assessed in quantitative terms, such as percentages, or in nonquantitatlveterms that range, for example, from a minimum to a maximum.Choice "d" is incorrect. The auditor cannot change inherent risk or control risk since they existindependently of the financial statement audit. Only detection risk can be changed at the auditor'sdiscretion.

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8. CPA-02759


Choice "b" is correct. Detection risk is inversely related to the risk of material misstatement. Therefore,an increase in the risk of material misstatement would cause a decrease in allowable detection risk.Choice "a" is incorrect. The auditor uses the assessed risk of material misstatement (combinedassessments of inherent and control risks) to determine the acceptable level of detection risk, which isthen used to determine the nature, extent, and timing of substantive tests. An increase in the risk ofmaterial misstatement would cause a decrease in allowable detection risk. This is accomplished byincreasing substantive testing.Choice "c" is incorrect. The auditor uses the assessed risk of material misstatement (combinedassessments of inherent and control risks) to determine the acceptable level of detection risk, which isthen used to determine the nature, extent, and timing of substantive tests. Inherent risk existsindependently of the audit and cannot be changed by the auditor.Choice "d" is incorrect. Materiality is a matter of professional judgment and is influenced by the auditor'sperception of the needs of a reasonable person who will rely on the financial statements. Materialitylevels would not be affected by a change in the assessed risk of material misstatement.

9. CPA-02903Choice "a" is correct. The auditor should design the audit to provide reasonabie assurance of detectingmaterial errors and fraud.Choice "b" is incorrect. The auditor is not "responsibie for" detecting all material errors, but is responsiblefor designing an audit to provide reasonable assurance of detecting material misstatements. Due to theconcealment aspects of fraudulent activity, however, even a properly planned and performed audit maynot detect a material misstatement resulting from fraud. While auditors provide only reasonable (and notabsolute) assurance of detecting fraud (due to such concealment factors), the presence of risk factorsmay still alert the auditor to the possibility that fraud exists.Choice "c" is incorrect. The auditor should specifically assess the risk of material misstatement of thefinancial statements due to fraud and consider that assessment in designing the audit, even if analyticalprocedures or tests of transactions do not identify specific conditions indicative of potential misstatement.Choice "d" is incorrect. The auditor does have some responsibility for detecting errors and fraud. Theauditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement, whether caused by error or fraud.

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Becker Professional Education I G'/\ LxJm Review Class Question Explanations

10. CPA02986Choice "a" is correct. A properly designed and executed audit may not detect a material misstatementthat is concealed through collusion. The auditor's responsibility is to design audit procedures that canreasonably be expected to detect material misstatements (errors and fraud) in the financial statements.Intentional misstatements that are concealed through collusion, however, are very difficult to detect, andgenerally the auditor is not responsible to discover them.Choice "b" is incorrect. An audit is designed to provide reasonable assurance of detecting materialmisstatements (both errors and fraud).Choice "c" is incorrect. If the factors considered in assessing control risk indicated an increased risk ofintentional misstatements, a properly designed and executed audit would have taken the increased riskinto consideration with additional audit procedures.Choice "d" is incorrect. In a properly designed and executed audit, the auditor would consider factorsinfluencing audit risk for account balances that have effects pervasive to the financial statements taken asa whole.

11. CPA02348Choice "a" is correct. Knowledge about the design and implementation of relevant internal controlsshould be used to identify types of misstatements that could occur.Choice "b" is incorrect. The operating efficiency of a control is not significant to the auditor; the auditor isconcerned with operating effectiveness. Also, the auditor is not required to assess operatingeffectiveness during the planning stage of the audit.Choice "c" is incorrect. Determining whether a control has been circumvented by collusion is not anormal part of the audit planning process.Choice "d" is incorrect. Assessment of control risk (and documentation of that assessment) must bebased on tests of controls, and not soleiy on knowledge about the design of controis.

12. CPA02679Choice "c" is correct. When performing analytical procedures, the auditor considers relevant nonfinancialinformation, which generally is related to financial data in some way. For example, a relationship mightexist between the square footage of selling space and the level of sales.Choice "a" is incorrect. The auditor would consider the turnover of accounting personnel when assessingcontrol risk and the risk of fraud, not when performing analytical procedures during planning.Choice "b" is incorrect. The auditor would consider the integrity of members of the audit committee whendeciding whether to accept the engagement and when assessing control risk and the risk of fraud, notwhen performing analytical procedures during planning.Choice "d" is incorrect. The auditor would consider management's plans to repurchase stock whenassessing control risk and when considering appropriate disclosure, not when performing analyticalprocedures during planning.

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13. CPA-05603


Choice "d" is correct. Risk assessment procedures must be performed to assess the risk of materialmisstatement and to determine whether and to what extent further audit procedures are necessary. Inaddition, the planning process and the overall review stage of the audit must include application ofanalytical procedures. Tests of the operating effectiveness of controls, however, are only performedwhen the auditor's risk assessment is based on the assumption that controls are operating effectively, orwhen substantive procedures alone are insufficient.Choices "a", "b", and "c" are incorrect, based on the above explanation.

14. CPA-02374Choice "a" is correct. In every audit, the auditor should obtain a sufficient understanding of the design ofrelevant internal controls pertaining to financial reporting in each of the five internal control components.Choice "b" is incorrect. The auditor is not required, as a part of obtaining an understanding of the entityand its environment (including its internal control), to determine whether internal controls are operatingeffectively.Choice "c" is incorrect. The auditor is not required, as a part of obtaining an understanding of the entityand its environment (including its internal control), to determine the consistency with which a control isapplied.Choice "d" is incorrect. Audit planning does not require an understanding of the controls related to eachaccount balance, transaction class, and disclosure component in the financial statements. For certainitems, a primarily substantive approach may be used instead.

15. CPA-02506Choice "b" is correct. The auditor should obtain sufficient knowledge of the client's information systemrelevant to financial reporting to understand the types of transactions processed, and how thetransactions are initiated, recorded and summarized. Included in the information system relevant tofinancial reporting is the preparation of significant accounting estimates.Choice "a" is incorrect. An entity's information system supports the identification, capture, and exchangeof information. Understanding the information system would not necessarily help the auditor tounderstand the safeguards used to limit access to computer facilities.Choice "c" is incorrect. An entity's information system supports the identification, capture, and exchangeof information. Understanding the information system would not necessarily help the auditor tounderstand the procedures used to assure proper authorization.Choice "d" is incorrect. An entity's information system supports the identification, capture, and exchangeof information. Understanding the information system would not necessarily help the auditor tounderstand the policies used to detect the concealment of fraud.



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Becker Professional Education I CP,\ exam Review

16. CPA-05750

Crass Question Explanations

Choice "b" is correct. When electronic data is not maintained indefinitely, the auditor must be careful toconsider the appropriate timing for audit tests, making sure that testing is performed while data is stillavailable.Choice "a" is incorrect. The auditor determines the acceptable level of detection risk based on theassessed risk of materiai misstatement (inherent risk and control risk). Assessed risk is not dependent onthe iength of time eiectronic evidence is available.Choice "c" is incorrect. Whether to adopt substantive or reliance test strategies (i.e., a substantiveapproach or a combined approach) is not dependent on the length of time electronic evidence isavailable.Choice "d" is incorrect. The assessed level of inherent risk is based on the nature of the underlyingassertion, and not on the length of time electronic evidence is available.17. TBS-00013I. Control Activities

A 8 C1. The occurrence assertion? X2. The completeness assertion? X3. Segregation of duties? X

1. B. When an accounts payable clerk verif ies that there is a completed voucher package for eachpurchase before preparing a check, the clerk is verifying that the purchase actually occurred.

2. A. When an employee in the accounting department accounts for prenumbered sales invoices andinvestigates any unexpected gaps, the employee may discover that the missing invoicerepresents an unrecorded sale and that sales revenue is incomplete.

3. C. An employee who has no other responsibi li ties with respect to cash should perform the monthlybank reconciliation, to maintain proper segregation of duties.

II. Inherent Limitations in Internal ControlA 8 C

1. Occurs without intent? X2. Involves participation of more than one person? X3. Is related to the control environment? X

1. C. Human error is an inherent limitation in internal control that occurs without intent.2. B. Deliberate circumvention of controls through collusion is an inherent limitation in internal control

that involves participation of more than one person.3. A. Management override evidences a poor control environment.

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18. CPA-02888


Choice "c" is correct. After performing risk assessment procedures, an auditor might decide not toperform tests of controls because it would be inefficient. in other words, the time required to perform testsof controis would be greater than the reduction in time spent on substantive testing.Choice "a" is incorrect. The auditor might decide not to perform tests of controls if the available auditevidence obtained through those tests would not support a decrease (not increase) in the levei of controirisk.Choice "b" is incorrect. A reduction in the assessed level of control risk can only be justified based ontests of controls. If the auditor decides not to perform tests of controls, the assessed level of control riskmay not be reduced.Choice "d" is incorrect. The relationship of inherent risk to control risk does not determine the level ofcontrol testing to be performed.

19. CPA-02372Choice "c" is correct. Client records documenting the use of EDP programs would be a relevant item foran auditor to examine while determining if internal control is operating as designed.Choice "a" is incorrect. Industry gross margin information is evidence an auditor would examine whileperforming analytical procedures. Analytical procedures may be used as substantive tests, since theydeal with dollar amounts rather than controls.Choice "b" is incorrect. Confirmation of receivables is evidence an auditor would examine whileperforming substantive tests, since they deal with dollar amounts rather than controls.Choice "d" is incorrect. Budgets and forecasts are evidence an auditor would examine whiie performinganalytical procedures (comparison of expected results to actual). Analytical procedures may be used assubstantive tests, since they deal with dollar amounts rather than controls.

20. CPA-02704Choice "b" is correct. Inquiry alone generally will no t support a conclusion for a lower assessed level ofcontrol risk.Choices "a", "c", and "d" are incorrect, as the following are true:a. Observation by the auditor provides more assurance than audit evidence obtained by inquiry alone.c. Prior audits may be considered by the auditor in assessing control risk in the current audit.d. An audit of financial statements is a cumulative process.

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Becker Professional Education I CPA Exarn Review Class Question Explanations

AUDITING 4

1. CPA-02643Choice "c" is correct. Audit documentation should show that the accounting records agree or reconcilewith the financial statements.Choice "a" is incorrect. Audit documentation may be permitted to serve as a reference source for theclient.Choice "b" is incorrect. Audit documentation may contain critical comments concerning management(e.g., documentation of disagreement with the opinions of management, such as accounts receivablevaluation ).Choice "d" is incorrect. Audit documentation is not the support for the FS. The client's books andrecords are the support for the FS. Audit documentation should be the principal support for the work theauditor has done to support the auditor's report.2. CPA-02334Choice "c" is correct. Substantive tests are concerned with dollar amounts and consist of tests of detailsof transactions and balances and analytical procedures. The objective of tests of details of transactionsperformed as substantive tests is to detect material (dollar) misstatements in the financial statements.Choice "a" is incorrect. Tests of details of transactions (performed as substantive tests) are used toevaluate management's assertions. While tests of details of transactions do help the auditor comply withGAAS, such compliance is not the primary objective of the tests.Choice "b" is incorrect. Attaining assurance about the reliability of the information system relevant tofinancial reporting is an objective of tests of controls rather than of substantive tests.Choice "d" is incorrect. Evaluation of the operating effectiveness of management controls is an objectiveof tests of controls rather than of substantive tests.3. CPA-02363Choice "c" is correct. A working trial balance is a part of the current year's audit documentation.Choice "a" is incorrect. Bond indenture agreements are typically found in the permanent file.Choice "b" is incorrect. Lease agreements are typically found in the permanent file.Choice "d" is incorrect. An internal control fiowchart is typically found in the permanent file.4. CPA-02371Choice "d" is correct. The content of the representation letter will generally not affect the nature andextent of audit documentation. Factors affecting the nature and extent of audit documentation include:1. The risk of material misstatement;2, The extent to which judgment was required in performing the work and evaluating the results;3. The nature of the specific auditing procedure;4. The significance of the evidence obtained;5. The nature and extent of any problems identified; and6. The need to document conclusions that may not be obvious.

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5. CPA02342


Choice "c" is correct. When audit evidence can be obtained from independent sources outside an entity,it provides greater assurance of reliability for the purposes of an independent audit than does evidencesecured solely within the entity. While the bank statement was obtained from the client, it is still morepersuasive than any of the other three items because it was not prepared by the client.Choice "a" is incorrect. Prenumbered client purchase orders are client-generated documents; as such,they are not as persuasive as externally generated evidence received through a client.Choice "b" is incorrect. Client work sheets supporting cost allocations are client-generated documents; assuch, they are not as persuasive as externally generated evidence received through a client.Choice "d" is incorrect. The client representation letter is a client-generated document; as such, it is notas persuasive as externally generated evidence received through a client.

6. CPA02373Choice "b" is correct. Relationships among income statement accounts tend to be more predictabie thanbalance sheet accounts (accounts receivable, accounts payable) because they represent transactionsover a period of t ime rather than at one point in time. In addition, relationships involving transactionssubject to management discretion (travel and entertainment) are iess predictable.Choices "a", "c", and "d" are incorrect, per the above explanation.

7. CPA02354Choice "c" is correct. To determine whether transactions have been recorded (completeness assertion),the auditor should test from the source documents to the accounting records (general ledger, trialbalances, etc.).Choices "a", "b", and "d" are incorrect. Testing from the accounting records to the source documentsprovides evidence of existence or occurrence, not completeness.

8. CPA02314Choice "a" is correct. Since the employee is destroying the invoices and related vouchers, the mostobvious documentation remaining wouid be the file of all cash disbursements. The auditor would selectitems from this file and then attempt to trace from specific cash disbursements to the related invoices andapproved vouchers. Missing documentation might be indicative of fraud.Choices "b" and "d" are incorrect. Since the employee destroys the related invoices and vouchers,selecting items from the file of remaining invoices and vouchers would never identify the fraUd.Choice "c" is incorrect. Selecting items from the fiie of receiving reports will not identify fraudulentpurchases that are shipped directly to the employees' home addresses.

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9. CPA04627


Choice "d" is correct. Blank forms may result in lower response rates because a greater effort is requiredfor response.Choice "a" is incorrect. Use of the blank form does not necessarily imply that subsequent cash receiptswill need to be verified. This is an alternative procedure that might be used to follow up on nonresponses.Choice "b" is incorrect. The decision regarding whether or not to use statistical sampling is independentof the decision regarding what form of accounts receivable confirmation to use.Choice "c" is incorrect. Blank forms provide a greater degree of assurance, since the recipient cannotsimply sign off without checking the balance. A greater degree of assurance results in a lower assessedlevel of detection risk.

10. TBS00014I. Revenues

Which audit procedure would most l ikely be used to:1. Verify that recorded sales are valid?

(2) Select a sample of entries in the sales journal and compare with the related shippingdocuments.To determine that recorded sales are valid (existence), one starts with recorded sales (Whichare shown as entries in the sales journal), and then sees if there are appropriate shippingdocuments (Which provide evidence that a sale occurred, or was valid). If there is an entry inthe sales journal for which there is no related shipping document, this might indicate afictitious sale.

2. Verify that all valid sales were recorded?(1) Select a sample of shipping documents, and identify those for which no related invoice exists.

To determine whether all valid sales were recorded (completeness), one must first start withevidence of a valid sale, such as a shipping document, and then verify whether that sale wasrecorded. Recorded sales generally result in generation of an invoice, so ifthere is ashipping document for which there is no related invoice, this might indicate a failure to recordthe sale.

3. Test for proper cutoff of sales?(6) Select shipping documents from just before year-end and verify that the related sale is

included in the sales register.If goods were shipped just before year end (assuming title transfers on shipment), one wouldneed to verify that the related sale was properly included in the saies register for the year. I fthe sale was not included in the sales register for the current year, it might be evidence of animproper cutoff of sales. Note that to fUlly test for proper cutoff, one would also need toselect shipping documents from just after year-end, and verify that the related sale wasexcluded from the sales register.

( c on t i n ued )

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II. ExpendituresWhich audit procedure would most likely be used to:1. Test for understatement of accounts payable?

(3) Select a sample of cash payments made after year-end, and identify those for which there isno related payable at year-end.Cash payments made just after year-end often relate to payables outstanding at year-end. Apayment made after year-end for which there is no related year-end payable might beindicative of an unrecorded liability at year-end.

2. Verify that cash disbursements were properly authorized?(1) Select a sample of entries in the cash disbursements journal and compare with related

voucher packages.Voucher packages should include a purchase order, receiving report, and vendor invoice.These documents are matched as part of the approval process, prior to making payment. Ifany items are missing, it might indicate that the cash disbursement was not properlyauthorized.

11. CPA-02443Choice "c" is correct. Tracing from the inventory schedule to the inventory tags and the auditor's recordcount sheets verifies the validity (existence) of the items.Choice "a" is incorrect. Tracing from inventory tags to the inventory listing schedule verifies thecompleteness of the schedule, not the existence (or validity) of the items.Choice "b" is incorrect. Tracing to receiving reports and to vendors' invoices from the inventory tagsmight be used to verify completeness of purchases or payables.Choice "d" is incorrect. Tracing from receiving reports and vendors' invoices to the inventory listing arecut-off procedures used to verify completeness of the inventory listing.

12. CPA02447Choice "a" is correct. In a search for unrecorded disposals, the auditor would vouch a sample of assetson the property ledger to those on hand in the client's facility.Choice "b" is incorrect. By touring the facility first, and then comparing assets found to those recorded onthe property ledger, the auditor is testing the completeness of the property ledger, a procedure used tosearch for unrecorded additions.Choice "c" is incorrect. Anaiysis of the repair and maintenance account is useful in identifyingtransactions that shouid have been capitalized versus expensed (i.e., unrecorded additions).Choice "d" is incorrect. Analysis of the repair and maintenance account is useful in identifyingtransactions that should have been capitalized versus expensed (i.e., unrecorded additions).

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Becker Professional Education I CrA Exam Review Class Question Explanations

13. CPA-02416Choice "b" is correct. By vouching to time card data, the auditor is testing the occurrence assertion forhours worked.Choice "a" is incorrect. Vouching to approved clock card data would provide evidence about hoursworked, not pay rates. Pay rates would be tested by comparing to personnel records.Choice "c" is incorrect. Vouching to approved clock card data does not provide evidence aboutsegregation of duties.Choice "d" is incorrect. Vouching to approved clock card data does not provide evidence about internalcontrols related to unclaimed paychecks. The auditor would need to observe a payroll distribution toevaluate these controls.

14. CPA-02536Choice "c" is correct. Reviewing confirmations of loans receivable and payable is useful for determiningthe existence of related party transactions because guarantees are commonly provided by or for relatedparties.Choice "a" is incorrect. Detection of unreported contingent liabilities is not a procedure that would assistthe auditor in identifying related party transactions.Choice "b" is incorrect. Recurring transactions after year-end are a usual business occurrence. Relatedparty transactions would most likely be nonrecurring.Choice "d" is incorrect. While financial difficulties may be associated with related party transactions, it isunlikely that analytical procedures would assist the auditor in identifying such transactions.15. CPA-02529Choice "c" is correct. The independent auditor's procedures with respect to litigation, claims, andassessments should include discussing with management the controls adopted for identifying, evaluating,and accounting for litigation, claims, and assessments.Choice "a" is incorrect. The evaluation of going concern issues is the auditor's responsibility.Choice "b" is incorrect. The auditor should examine documents in the client's possession concerninglitigation, claims, and assessments, including correspondence and invoices from lawyers. The auditordoes not generally examine documents held by the client's lawyer.Choice "d" is incorrect. The client's lawyer would only know about mailers that he or she has beenengaged to handle, which might not include allllligation, claims, and assessments. In addition, it is theauditor's responsibility (not the lawyer's) to determine whether litigation, claims, and assessments havebeen adequately recorded or disclosed in the financial statements.16. CPA-02927Choice "a" is correct. An integrated test facility uses test data commingled with actual data to testtransactions.Choice "b" is incorrect. An input controls matrix is an input control.Choice "c" is incorrect. Parallel simulation involves writing a computer program that duplicates the logicof a client's program, using identical data as input, and comparing output.Choice "d" is incorrect. A data entry monitor is an input control.



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17. CPA-02920


Choice "d" is correct. Parallel simulation is a technique in which the auditor reprocesses the client's datausing the auditor's own software. The auditor then compares his or her results to those obtained by theclient.Choice "a" is incorrect. The test data approach uses the auditor's input data on the client's system, offline.Choice "b" is incorrect. Reviewing program logic is not a computer-assisted audit technique.Choice "c" is incorrect. An integrated test facility uses the auditor's input data on the client's system, online.

18. CPA-02924Choice "a" Is correct. One of the primary benefits of using generalized audit software is the ability toaccess client data stored in computer files without having a detailed understanding of the client'shardware and software features.Choice "b" is incorrect. The use of generalized audit software would not affect the auditor's decision withrespect to using substantive tests of transactions in place of analytical procedures.Choice "c" is incorrect. Generalized audit software is used to extract and analyze data. Self-checkingdigits and hash totals are controls embedded in client software applications to ensure accuracy. They arenot a part of generalized audit software.Choice "d" is incorrect. The use of generalized audit software does not reduce the need to perform testsof controls if reliance on controls is planned.19. CPA-04622Choice "d" is correct. If a second, similar retail outlet were opened, one would expect sales and accountsreceivable to double. As long as the collection rates for the new outlet's receivables were expected to besimilar to those of the original outlet, however, the allowance for doubtful accounts as a percentage ofaccounts receivable would remain the same.Choice "a" is incorrect. If the client sold more merchandise to customers with poor credit ratings, theallowance for doubtful accounts as a percentage of receivables should increase to reflect the greater levelof estimated bad debts.Choice "b" is incorrect. Write off of a specific account receivable reduces both the allowance and thereceivable by the amount written off. If there were twice as many write offs in the previous year than inthe current year (and this were the only difference), the allowance for doubtful accounts as a percentageof receivables would not stay the same.Choice "c" is incorrect. If more receivables are potentially uncollectible in the current year (as opposed tothe prior year), the allowance for doubtful accounts as a percentage of receivables should increase toreflect the greater level of estimated bad debts.

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20. CPA-02310Choice "b" is correct. If control accounts in the general ledger do not reconcile to the subsidiary ledgers,there may be a problem in the way transactions were recorded and posted. Failure to investigate suchdifferences implies that, if such a problem exists, it has not been identified and corrected. The auditorwould therefore suspect that material misstatements exist in the client's financial statements.Choice "a" is incorrect. The assumptions used in deveioping accounting estimates generally do changeas new information becomes avaiiable or as situations or conditions change. This would not necessarilyindicate that a material misstatement exists.Choice "c" is incorrect. Since responses to negative confirmations are only received when there arediscrepancies, a lower response rate likely would be indicative of fewer problems with accountsreceivable. This corresponds to a reduced likelihood of material misstatement.Choice "d" is incorrect. Management's consultation with another CPA firm about complex accountingmatters indicates proactive steps on the part of management to accurately address those matters.Material misstatements with respect to the complex accounting matters therefore would be less likely toexist.

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AUDITING 5

1. CPA02588Choice "b" is correct. Attribute sampling is used to test controls. Inspecting employee time cards forproper approval by supervisors is a test of controls. Controls often relate to authorization, validity,completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and properperiod. Look for these terms in identifying which option is a test of controls. Words such as accountbalance, amount, valuation, presentation, and disclosure are more likely to relate to substantive tests.Choice "a" is incorrect. Selecting accounts receivable for confirmation of accounts balances is asubstantive test.Choice "c" is incorrect. Making an independent estimate of the amount of a LIFO inventory is asubstantive test.Choice "d" is incorrect. Examining invoices in support of the valuation of fixed asset additions is asubstantive test.

2. CPA02602Choice "d" is correct. If the actual deviation rate in the population exceeds the maximum deviation ratebased on the sample, control risk will be understated, since the control will be less effective than sampleresults would indicate.Choice "a" is incorrect. No comparison should be made between the true deviation rate and the risk ofassessing control risk too low.Choice "b" is incorrect. If the true deviation rate is lower than the deviation rate in the sample, control riskmay be assessed at a rate that is too high, potentially leading to audit inefficiencies.Choice "c" is incorrect. No comparison should be made between the true deviation rate and the risk ofassessing control risk too low.

3. CPA02620Choice "c" is correct. Erroneously concluding that an account balance is materially misstated is anexample of incorrect rejection.Choice "a" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details(SUbstantive testing).Choice "b" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details(substantive testing).Choice "d" is incorrect. If the auditor had concluded that the account was fairly presented when, in fact, itwas not, it would be an example of incorrect acceptance.

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4. CPA-02594


Choice "d" is correct. The auditor will reduce reliance on a control if the upper deviation rate exceeds thetolerable rate. The upper deviation rate consists of the sample deviation rate plus an allowance forsampling risk. Therefore, if the sample deviation rate plus the allowance for sampling risk exceeds thetolerable rate, that is equivalent to the upper deviation rate exceeding the tolerable rate.Choice "a" is incorrect. If the sample deviation rate plus the allowance for sampling risk equals thetolerable rate, the auditor may still place the planned amount of reliance on the control.Choice "b" is incorrect. Whether the actual sample deviation rate Is less than the expected deviation rateis irrelevant for making decisions about planned reliance levels.Choice "c" is incorrect. If the tolerable rate less the allowance for sampling risk exceeds the sample rateof deviation, then the upper deviation rate is less than the tolerable rate. This situation supports theplanned reliance, and no reduction in planned reliance would be necessary.

5. CPA-02607Choice "b" is correct. The auditor may be able to reduce the reqUired sample size by separating itemssubject to sampling into relatively homogenous groups on the basis of some characteristic related to thespecific audit objective.Choice "a" is incorrect. While PPS sampling results in a stratified sample, it is a result of the samplingmethod employed and does not require the auditor to perform stratification since it occurs automatically.Choice "c" is incorrect. The estimated tolerable misstatement does not affect the decision to stratify.Choice "d" is incorrect. The standard deviation of the recorded amounts represents the popUlation'svariability. Therefore, the auditor would be most likely to stratify when the standard deviation is high, notlow.

6. CPA-02617should consider how much monetary misstatement in the account might exist without causing thefinancial statements to be materially misstated (tolerable misstatement) as well as the expected size andfrequency of misstatements.Choices "a", "c", and "d" are incorrect, per the above explanation.

7. CPA-02584Choice "b" is correct. The sample error of $1 ,000 ($5,000 - $4,000) is projected to the entire intervalthrough use of a "tainting factor" of 20% ($1,000/$5,000). If this were the only misstatement discoveredby the auditor, the projected misstatement of this sample would be 20% of $1 0,000, or $2,000.Choice "a" is incorrect, as the sample error of $1 ,000 needs to be projected to the entire interval.Choices "c" and "d" are incorrect, per the above explanation.

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8. CPA-02596Choice "d" is correct. The auditor should consider both the qualitative and the quantitative aspects ofdeviations in tests of controis. Qualitative aspects might include whether deviations are indicative of anerror or fraud. Such an evaluation is important because fraud is intentionai, has implications beyond thedirect monetary effect, and requires consideration of the implications for other aspects of the audit. Thus,a deviation initially concealed by a forged document is very serious and deserves broader considerationthan a deviation of the same dollar amount due to an error.Choice "a" is incorrect. The fact that a deviation was the only one discovered would have no importancebeyond its impact on the computation of the upper deviation rate.Choice "b" is incorrect. Discovery of a deviation identical to one discovered during the prior year's audit isnot necessarily cause for additional concern.Choice "c" is incorrect. Employee misunderstanding of instructions is an inherent limitation of internalcontrol and is not necessarily cause for concern.

9. CPA-02542Choice "d" is correct. Conditions noted by the auditor that are significant deficiencies or materialweaknesses should be reported in writing. Any report issued on such conditions should (1) indicate thatthe purpose of the audit was to report on the financial statements and not to provide assurance oninternal control; (2) include the definition of materials weakness and, if applicable, significant deficiency;(3) include a restriction on use (I.e., the report is intended solely for the information and use ofmanagement, those charged with governance, etc.).Choice "a" is incorrect. During an audit, the auditor is not required to design tests specifically to detectsignificant deficiencies in internal control.Choice "b" is incorrect. Significant deficiencies in internal control are not generally disclosed in the annualreport, and the auditor's letter on such conditions observed during a financial statement audit is intendedsolely for the information and use of management, those charged with governance, and others within theorganization.Choice "c" is incorrect. Management does not provide an assertion concerning the effectiveness ofinternal control as part of a financial statement audit of a nonissuer (but would provide such an assertionin a separate engagement related to internal control).

1O. CPA-02551Choice "d" is correct. In reporting on a nonissuer's internal control over financial reporting in an attestengagement (not an audit), the practitioner's report should include a paragraph stating that, because ofinherent limitations of any internal control, errors or fraud may occur and not be detected.Choice "a" is incorrect. Documentary evidence need not be provided in the practitioner's report.Choice "b" is incorrect. The practitioner need not mention any changes in internal control since the lastreport.Choice "c" is incorrect. The practitioner should not describe any potential benefits that might resuit fromthe practitioner's suggested improvements.

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11. T8S-00005


A B C D E F G H1. Joanna, CPA, is auditing the financial statements of X X X XEndicon, a publicly held company.2. James, CPA, is auditing the financial statements of X X X XPerfect Papers, a privately held company.3. Adam, CPA, has been hired to examine and report onthe internal control of White Cloud Cleaning Service, a X X X X Xprivately held company.

Explanation:1. A,D,F,G2. C, D, G, H3. B, C, D, F, GOption A:Option B:Option C:

Option D:Option E:Option F:Option G:Option H:

PCAOB AS 5 applies to all audits of public companies.SSAE apply to the examination of the internal control of nonissuers. An internal controlexamination must be integrated with a financial statement audit.SAS applies to audits of nonissuers. When an auditor performs an examination of anonissuer's internal control over financial reporting, the auditor must also perform an audit ofthe nonissuer's financial statements.Management representations are required for all audit and examination engagements.When reporting on the internal control of a nonissuer or an issuer, material weaknessesresult in an adverse opinion. A qualified opinion is not permitted.When reporting on the internal control of a nonissuer or an issuer, material weaknessesresult in an adverse opinion. A qualified opinion is not permitted.The auditor should always communicate significant deficiencies and material weaknesses, inwriting, to management and those charged with governancelthe audit committee.A report on internal control matters noted during an audit should be restricted as to use.

12. CPA-02540Choice "b" is correct. If those charged with governance are not involved with managing the entity, theauditor should communicate material, corrected misstatements brought to management's attention as aresult of the audit.Choice "a" is incorrect. Certain matters communicated to those charged with governance, such as thoserelated to the competence and integrity of management, might not be appropriate for discussion withmanagement.Choice "c" is incorrect. The auditor should communicate disagreements with management, whether ornot resolved.Choice "d" is incorrect. Previously communicated significant deficiencies that have not been correctedshould be communicated again, in writing, during the current audit.

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13. CPA-02533


Choice "b" is correct. The purpose of the management representation letter is to confirm management'soral evidence supplied during the engagement. Specific written representations obtained by the auditorshould include acknowledgment as to the completeness and availability of minutes of stockholders' anddirectors' meetings.Choice "a" is incorrect. Communications with those charged with governance are generally not includedin the management representation letter, whereas communications from regulatory agencies regardingnoncompliance with, or deficiencies in, financial reporting practices would be included.Choice "c" is incorrect. Management's subsequent plans need not be included in the managementrepresentation letter, unless they will affect the carrying value or classification of assets and liabilities.Choice "d" is incorrect. Management acknowiedges its responsibility for the fair presentation of thefinancial statements and states that they are unaware of any employee fraud, but does not acknowledgeresponsibility for the detection of employee fraud.

14. CPA-03517Choice "b" is correct. The auditor must assess whether management has identified laws and regulationsthat have a direct and material effect on the determination of amounts in an entity's financial statementsand obtain an understanding of the possible effects on the financial statements of such laws andregulations.Choice "a" is incorrect. The auditor must issue a separate report on the consideration of the entity'sinternal control, not on the expected benefits and related costs.Choice "c" is incorrect. Government Auditing Standards (the Yellow Book) specify that the auditor shoulddesign the audit to provide reasonable assurance that materiai errors and fraud are detected.Choice "d" is incorrect. The auditor may be required to express an opinion on whether the entity hascomplied with the requirements applicable to its major federal financial assistance programs, but notwhether it is still eiigible to receive assistance.

15. CPA-06037Choice "a" is correct. An objective of a compliance audit of a governmental entity is to form an opinionon whether that government complied with applicable compliance requirements in all materialrespects, and then to report at the level specified by the governmental audit requirement.Choice "b" is incorrect. The auditor specificaily reports that the audit does not provide a legaldetermination of compliance with requirements.Choice "c" is incorrect. The auditor is to identify audit and reporting requirements (e.g., Singie Audit/OMBCircular A-133 requirements) supplementary to GAAS and GAGAS and perform procedures to addressthose requirements.Choice "d" is incorrect. The auditor cannot minimize control risk. Control risk cannot be influenced by theauditor.

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16. CPA-06038


Choice "b" is correct. As risk of material noncompliance increases, detection risk of noncomplianceshould decrease to reach a desired level of overall audit risk of noncompliance. This concept is identicalto the relationship between risk of material misstatement and detection risk.Choice "a" is incorrect. Audit risk of noncompiiance, like audit risk in financial audits, is the product of riskof material noncompiiance and detection risk.Choices "c" and "d" are incorrect. Both inherent and control risk are components of risk of materialnoncompiiance.

17. CPA-03542Choice "b" is correct. Auditors should report on the scope of their testing of compliance with laws andregulations and of internal controls.Choice "a" is incorrect. The auditor would assess whether the entity has reportable measures ofeconomy and efficiency that are vaiid and reiiable as part of an economy and efficiency (performance)audit, not a financial statement audit.Choice "c" is incorrect. The auditor may report the methods of statistical sampling used as part of aperformance audit.Choice "d" is incorrect. A program audit would determine the extent to which the entity's programsachieve the desired level of results.

18. CPA-05604Choice "b" is correct. Under the Single Audit Act, materiality is determined separately for each majorfederal financial assistance program.Choice "a" is incorrect. Under a GAAS audit, materiality is determined in relation to the financialstatements taken as a whole. Under a GAGAS audit, materiaiity levels may be lower due to the publicaccountability of the entity, the various legal requirements, and the visibility and sensitivity ofgovernmental programs, activities, and functions.Choice "c" is incorrect. Materiality must be determined before risk is assessed.Choice "d" is incorrect. The Single Audit Act does not require that ali balances be tested.

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19. CPA03514Choice "a" is correct. Audits of federal financial assistance under the Single Audit Act require that theauditor determine if the auditee has complied with laws, regulations, and provisions of the contracts orgrant agreements.Choice "b" is incorrect. Materiality in audits of federai financial assistance is set at the program level andis not determined by the government entities that provided the federal financial assistance to therecipient.Choice "c" is incorrect. If the internal auditors are considered organizationally independent for internalauditing purposes, then they can be considered independent when conducting audits external to thegovernment entity to which they are routinely assigned. Organizationally, independent refers to the auditorganization being outside of line management, reporting to the chief executive or administrative officer;that is, the internal auditors will report their findings objectively without fear of political repercussion.However, in this case, an external auditor need not be involved in the audit, and no written managementrepresentations regarding the internal auditors need be obtained.Choice "d" is incorrect. In audits of federal financial assistance under the Single Audit Act, the auditordoes not express negative assurance on items not tested.

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Accuracy - A financial statement assertion in the"transactions and events" category indicating thatamounts and other data relat ing to recordedtransactions and events have been recorded properly.Accuracy and Valuation - A financial statementassertion in the "presentation and disclosure" categoryindicating that financial and other info

Documents

2011 Becker CPA AUD Class Questions